Euro Chiefs Set to Grant Greece Extension Amid Squabbles

By Jeff Black and Stephanie Bodoni -
Oct 31, 2012

Euro-area finance chiefs may grant
Greece more time to meet its bailout targets even as they split
on whether the country needs another debt writedown and Greek
politicians squabble over further austerity measures.

With Greece facing a sixth year of recession, fellow euro-
region governments are preparing to allow Prime Minister Antonis Samaras’s government “a somewhat flatter adjustment path” to
achieve its deficit-reduction goal, said Thomas Wieser, head of
the group that prepares meetings of euro-area finance ministers.

The target of a primary surplus equivalent to 4.5 percent
of gross domestic product “should in theory soon be reached,
but in view of the slump in the economy we see that now as being
only very, very difficult to achieve,” Wieser said today in an
interview with German radio station Deutschlandradio. “We’ve
not taken any decisions, but it could be that it’s postponed by
one or two years.”

European policy makers are again seeking ways to keep
Greece in the euro and avert an exit that former Deutsche Bank
Chief Executive Officer Josef Ackermann said on Oct. 29 would
cost “several hundred billion” euros. Finance ministers were
due to hold a conference call from 12:30 p.m. Brussels time and
may release a statement afterwards.

Greek Budget

In Athens, the Greek government cut its economic outlook
for 2013 as it unveiled a budget that deepens cuts to pensions,
wages and social benefits. The economy will shrink 4.5 percent
next year, more than the 3.8 percent forecast on Oct. 1, the
budget document released by the Finance Ministry today shows.

Ministers on the conference call will receive an update on
the state of negotiations between the Greek authorities and the
so-called troika of the International Monetary Fund, the
European Central Bank and the European Commission, said Wieser.

“While the negotiations aren’t finished, they are quite
close to the end,” he said. “The last steps to agreement are
always the most difficult.”

An extension of the program timeframe wouldn’t require
extra funds from the member states since “it can be financed
within the existing programs,” Wieser said. A debt writedown,
or haircut, wasn’t discussed by deputies yesterday, he said.

European officials are grappling over ways to fill Greece’s
financing gap two weeks before a decision is due on whether to
give the country its next 31.5 billion euro ($41 billion) aid
tranche. While German Chancellor Angela Merkel has signaled her
desire to stand behind Greece’s euro membership, Samaras’s
coalition is at odds over the steps needed to secure more money.

‘Some Creativity’

“Filling the funding gap for Greece will again require
some creativity,” said Carsten Brzeski, a senior economist at
ING Group in Brussels. He cited a possible combination of
options such as lowering the interest rates on the first two
Greek packages and front-loading parts of the funding of the
second package. “This could again kick the Greek can further
down the road,” he said.

Policy makers are trying to work out a plan that will cut
Greek debt to 120 percent of GDP by 2020 from about 144 percent
now amid the worst recession in a generation. Today’s budget
document forecasts that Greek general government debt will reach
189.1 percent of GDP next year. Failure to hit the debt target
could see the IMF withdraw aid, sparking another wave of
speculation about Greece’s future in the euro.

IMF Managing Director Christine Lagarde, who met with
Merkel yesterday, has suggested that Greece may need another
debt cut after governments and banks earlier this year agreed to
the biggest restructuring in history. Merkel’s government, the
biggest single contributor to Greece’s two bailouts to date,
opposes such a move. At the same time, it has signaled it’s
willing to consider an ECB proposal for a buyback of Greek debt.

‘Credible’ Effort

“A Greek debt relief will probably be achieved via a
combination of different measures,” Lagarde was cited as saying
in an interview with Belgian newspaper De Standaard today.
Greece’s budget effort “needs to be credible. That’s why more
time is needed.”

In Greece, politicians are still haggling over the measures
needed to clinch a new bailout agreement. Samaras said yesterday
that negotiations on a new austerity package had been completed,
sparking criticism from his coalition partners who said
divisions still remain.

Democratic Left, which has said it will support the budget,
yesterday reiterated opposition to proposed labor reforms. Pasok
leader Evangelos Venizelos said talks on the deal will continue
up to a Nov. 12 meeting of euro-area finance ministers.

‘Hasty’ Announcement

The “hasty” announcement while Pasok and Democratic Left
were holding meetings of their lawmakers is “at the very least
unfortunate,” Venizelos said. “When Mr. Samaras announces the
completion of negotiations on the measures and the budget he
obviously means on the troika level.”

Samaras’s government presented the budget to parliament
today, though no date has been set for a vote.

For now, Germany and France are signaling that they will
work out a plan for Greece. French Finance Minister Pierre Moscovici, speaking at a joint press briefing in Berlin
yesterday with German Finance Minister Wolfgang Schaeuble, said
that policy makers are trying to find a “comprehensive solution
during the month of November.”